Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

Even if you were able to divine the future trajectory of the economy from a pretty chart like this, it wouldn’t necessarily help you time the market. ECRI own the only economic indicators proven to be worth following – and that black box is glued tightly shut.

To me, the most under-appreciated leading indicator is investor psychology – and we have a living embodiment of it in a century of recorded stock market history. Economic catastrophes, wars, crashes, monster bull markets, the 20th century had them all.

We now have a 100-years of investor behaviour in all these circumstances to draw upon, and it’s indisputable that patterns repeat. Not exactly, never perfectly, but as long as human beings still experience pure panic and blind greed it will be possible to predict market moves with just enough of an edge to make the game pay.

The trick is to wait patiently until the market reaches a true extreme. I think we reached one in October.

I guess it matters what point of view you want to have when you look at what we all call “the economy”. If you are someone who is profiting from this economy, then the “core statistics” that are considered the Russell econometrics are sufficient. Others before me have pointed out the fallacy of measuring GDP growth, so I will not berate the obvious.

But how do we measure a successful economic environment in something akin to a democracy in which “all men [and women] are created equal” (ie., have equal opportunity) ???? Should we do this from the investor’s point of reference?

How about from the point of view of someone who is 45 years old, working as a cashier at the local supermarket, has two children, one of college age, and a married partner who works as an auto mechanic. What are their concerns?

* ratio of college graduates to high school graduates

* percentage of high school graduates who also graduate from college

* percentage poverty rate

* minimum poverty level income : as a calculation of average rent and basic basket of necessary goods and services

* percentage senior citizen poverty rate

* employment rate for 21-40 year olds

* inflation: including food, gas, and rent (ie., what the other 99% pays for)

* cost of college tuition divided by median income

* percentage of millionaires as a ratio to non-millionaires

* percentage of rental income to total income

* core inflation: food + rent + gas

Money can be made and GDP growth can be positive, and all of the above statistics can be poor and declining nevertheless.

Hence, of what value is the Russell economic indicators? Short-term trend? From whose point of view?

What struck me immediately is how much like a blood panel from a lab this is: you have a typical range for the value, and then you have a score for the current sample. Whether you are inside or outside of the typical range is highlighted by the chart, and what you are looking at is values that independently say something about the functioning of the individual.

But it also likely suffers from some of the same weaknesses as a blood panel: this makes the values for the normal range look really important, but for any given individual, you can be on the tails of the bell curve that built the norm – and still be completely normal. For those individuals, knowing what is “typical” is useless. Also, you are looking for a combination of things that will let you know what underlying cause is presenting certain symptoms: without a metaframework for interpreting what you see, it is misleading at best and useless at worst. Also, watch out for how the “typicals” were built statistically, and bear in mind that any given value can be off without being “wrong,” or really meaning anything, in specific conditions.

So my question would be: what exactly are you looking to diagnose? Are you looking for market condition indicators to use in picking assets or investments that perform certain ways under certain conditions? See trends building? Looking for combinations of factors moving together to suggest a disease state? Some things are facilitated by knowing the norm and some things really are best done without concern for the “norm” – it’s a weird benchmark to build a normal range (an estimate) out of marketwide stats (each estimates).

I look at these indicators from a absolute (current versus observed historical) and relative (US versus global) basis. Due to the difficulty in analyzing macro factors around the world in one coherent and systematic way, I developed my own site to do try to do this!

We allow users to define ‘risk indexes’ per capital market (currently cover global stocks, Treasuries, Corporates, High Yield, and Commodities), which can be a tedious process. The value itself sometimes is confusing: yes Industrial Production was up, but what does that mean compared with last month? Its at a three month high, but is still 10% below last year, is that good or bad? etc … so we look at the statistical distribution of the trend of the indicator: ie look at 12-month trend on IP, and then evaluate the current value as a deviation from the trend (the Z-score).

So again, for us it is relevant not to just look at the current value, but how does that value translate into the current trend, and how does that trend measure against historical contractions / recoveries, etc, and lastly how does the US or any other country stack up against other countries measured on the same basis?

Do they provide any investing advice? Difficult to say, I do however think they 1) provide valuable clues and 2) allow money managers to transmit alot of knowledge to clients. The valuable clues depends on what the asset manager is looking for: short term ‘economy is improving’ indicators or long term ‘are we at a cyclical bottom / top’ indicators. I am not saying they will ever be perfect timing indicators, but do provide a level of data support to coincide with your gut feeling. And the best part about it is ‘letting the data speak for itself’ …

there are too many people for the planet to support (carrying capacity)

resources are dwindling at an astounding rate (includes oil, water, top soil, food, etc) on this finite planet

we have no plan to change anything (like yeast on a Petri dish, we’re just gonna commit suicide by overproducing and overconsuming the limited resources we have) or adapt to some sustainable future

money is fiction and the global financial system is a trainwreck/clusterfuck (take your pick)

“Two things are infinite: the universe and human stupidity; and I’m not sure about the universe.”
― Albert Einstein
or
“Insanity is doing the same thing, over and over again, but expecting different results.”
― Albert Einstein

“Two things are infinite: the universe and human stupidity; and I’m not sure about the universe.”
vs
“Our most pressing needs and worst plights will be solved by engineers and entrepreneurs, not by philosophers or doomsayers.”
there IT is
I Love This Blog

The question is what you use them for. If you are a trader you just have to remember that a lot of stuff is already baked into the prices. Also you have to be aware of the reverse effects. Today the economy looks a little better so stocks go down because it makes QE3 less likely (or at least push it further into the future). So good economic news sometimes is bad and sometimes is good for stocks. In the long run the economy and stocks have positive correlation but you may end up dead long before the “long run” pans out.

It’s cool but saying Malthus was wrong for 2 centuries means nothing. How long did the church imprison scientists for thinking the sun was the center of the solar system? Was it more than 500 years?

The earth is littered with the fossils of dead species, and has had many different shapes and environments jarred with mass extinctions when the dominant species in the eco-system collapsed … over 100s of millions of years.

What is 300 years really? The rebuttal you make to the yeast in the petri dish doesn’t refute the argument, because the reality is that humans are exhausting the resources and destroying the aquifiers, the rivers, the ocean, the mountain-tops, and the air we breathe. Climate and environmental change due to massive population increase occurs exponentially when the tipping point is reached.

A man falling down 100 stories will think all is well when he is on the 99th floor.

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About Barry Ritholtz

Ritholtz has been observing capital markets with a critical eye for 20 years. With a background in math & sciences and a law school degree, he is not your typical Wall St. persona. He left Law for Finance, working as a trader, researcher and strategist before graduating to asset managementRead More...

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